The UK North Sea oil and gas industry endured its most challenging year for exploration in 2025, with future investment projected to plummet significantly. Companies halted new drilling activities amid profound uncertainty surrounding the government’s evolving tax policies, leading to a historic low.
According to energy consultancy Wood Mackenzie, no exploration wells were drilled in UK waters throughout 2025. This marks the first year without fresh exploration activity in the North Sea since oil and gas discoveries began in the 1960s. The financial outlook is equally stark, with investment, which stood at £4.4 billion in 2025, expected to fall by over 40 per cent to just above £2.5 billion in 2026. This would represent the lowest investment level since the tumultuous early 1970s, a period characterised by high costs, industrial unrest, and rampant inflation within the UK oil sector.
“Drilling is at an all-time low,” affirmed Gail Anderson, Wood Mackenzie’s research director for the North Sea. She anticipates a further contraction in the number of North Sea operators due to ongoing consolidation, driven significantly by a combined headline tax rate of 78 per cent. While new exploration ceased, 36 appraisal and development wells were drilled in 2025, though this figure is half that recorded in 2020, the initial year of the coronavirus pandemic.
Martin Copeland, chief financial officer at North Sea producer Serica, commented on the prevailing sentiment: “Activity was terrible in 2025 because there was so much uncertainty.”
The Impact of the Energy Profits Levy
A primary driver of this uncertainty has been the Energy Profits Levy (EPL), introduced by the then Conservative government in May 2022. Initially set at an additional 25 per cent on profits, the levy was designed to capture perceived windfall gains stemming from the surge in oil and gas prices following Russia’s invasion of Ukraine. It was subsequently increased to 35 per cent from January 2023 and further raised to 38 per cent from November 2024, bringing the total tax burden on North Sea operators to 78 per cent when combined with existing taxes. While oil prices mostly traded below the levy’s $76 a barrel threshold in 2025, gas prices consistently exceeded 140p a therm, well above the 59p trigger, ensuring the levy remained impactful. Official forecasts predict EPL receipts will plunge from £2.9 billion in 2024-25 to just £300 million by 2029-30 as companies adjust strategies or withdraw.
Linda Cook, chief executive of Harbour Energy, one of the North Sea’s largest producers, sharply criticised the environment. “It’s the worst of the fiscal environments among all the countries that [we] operate in,” she stated, adding that the UK industry was competing with “one arm tied behind its back.” The government did introduce an Energy Security Investment Mechanism (ESIM) in 2024, designed to trigger an early end to the EPL if oil and gas prices fall below certain thresholds for a sustained period. However, its impact on investment confidence has been limited.
Maturity and Future Prospects
The UK North Sea is a mature basin, with production having declined significantly from its peak. While the source article notes a peak of approximately 2.3 million barrels of oil a day in 1983, broader data suggests UK North Sea oil output reached around 2.9 million barrels per day in 1999. Production has since fallen to 530,000 barrels per day. Major oil companies have largely divested or exited the basin in favour of more lucrative global opportunities, leaving operations predominantly in the hands of smaller, independent firms. High-profile projects, such as Equinor’s Rosebank development and Shell’s Jackdaw field, have also faced legal challenges and regulatory delays, further contributing to the perception of a “hostile environment.”
Despite the current nadir, executives and analysts anticipate a recovery in investment from 2027 onwards, driven by the Labour government’s proposed new tax regime set to commence in 2030. This post-EPL system would levy additional tax only when oil prices exceed $90 a barrel and gas prices surpass 90p a therm.
“What has replaced the EPL is a very pragmatic system which will work for all parties,” said James Midgley, an oil and gas research analyst at Cavendish. He suggests this could prompt companies to initiate investments from 2027 to bring new production online by 2030. Wood Mackenzie also highlights that increasing domestic UK Continental Shelf (UKCS) production could remain within international net-zero climate pathways and displace higher-emission imported liquefied natural gas (LNG), offering both environmental and economic benefits.
The UK government maintains its commitment to building a “prosperous and sustainable future for the North Sea,” balancing record investment in clean energy with supporting existing oil and gas fields during the transition. Acknowledging the continued need for hydrocarbons for decades, the government states a “new permanent windfall tax” will replace the EPL, aiming to provide “long-term certainty to plan, invest and support jobs.”
